On personal finance.

Stay on track by tracking your spending

On a warm and sunny Saturday in Rome, my wife, Georgina, and I spent one American cent by tossing it into the famed Trevi Fountain and wishing for good health (and a return to Rome, of course).

Another expenditure that afternoon, July 26: The equivalent of $28.28 in American money for an alfresco lunch of minestrone soup, breaded chicken cutlets and steamed broccoli, served with a bottle of sparkling mineral water at the La Locanda del Tempio restaurant on the Via di Pietra.

Details about that day come from our happy memories. Details about how much we paid come from our money diary where we record, literally, every penny we receive or spend.

That's how we know, for example, that we have spent $1,490.19 so far this year to keep our two cars running, including the cost of gasoline, insurance, oil changes and renewing our registration and tags. We've spent $434.06 eating out (not counting vacations), $2,407.79 on groceries, $506.86 for electricity and (ouch!) $6,798.74 for health care, including insurance premiums and unreimbursed out-of-pocket expenses.

Many people pooh-pooh such painstaking attention to financial detail. Others consider it too bothersome. Our experience is quite the opposite.

Such recordkeeping takes very little time when you do it regularly, particularly with easy-to-use and inexpensive financial software so readily available. And the insights you'll get from your records will form the cornerstone of your financial planning.

Also, keeping track of your money has nothing to do with being a cheapskate. It has everything to do with knowing where you stand.

In addition--and that's why I bring up the subject today--keeping track of how much we are spending now is by far the most effective way I've found to begin to answer the elusive question of how much money we need to be able to retire.

That's a question puzzled readers ask me constantly, and one that seems particularly pressing these days. I've written repeatedly about surveys that show Americans are increasingly worried they will not have enough money to retire comfortably. Many think they will never be able to retire at all.

The answer to the how-much-money-we-need-in-retirement-question must come in two steps.

First, we need to determine how much money we will need, or want, to spend each year in retirement.

Once we do that, we need to calculate what size nest egg will be big enough to allow us to spend that much.

The second calculation can be a tricky one, involving assumptions about how long we will live and future rates of investment return and inflation, among other things.

But as complex as that number crunching can be, we cannot begin to attempt it until we answer the first question first: How much money will we spend each year in retirement?

The overly simplistic answer--I've been guilty of parroting it sometimes--is at least 70 percent to 80 percent of your pre-retirement income in order to maintain the same lifestyle. As some astute readers have pointed out, such an answer totally misses the mark.

"The amount of money needed for living after retirement should not be a percentage of pre-retirement income, but of pre-retirement spending," said Adrianne Roberts, a South Florida resident who retired at age 55 three years ago.

The obvious reason: Not everyone spends everything they earn. So, if you want to project the present into the future, what matters is not how much you make now, but how much you spend.